Sifting for Value

Q:Let's move on and talk about a few stocks in the portfolio. A: The first one is
Schlumberger
(SLB).

Q:We just did a story about them recently (see Weekday Trader, "Schlumberger: As Good as Gould," February 4, 2003). What's to like here?A: Schlumberger is technologically one of the premier oil-field service companies, with capabilities everywhere in the world. The company sold at a huge premium to the group two or three years ago. Then they did this ludicrous thing when they bought [a technology services company] called Sema.

Q:They paid a big price, didn't they?A: Yes, about $4 billion.

Q:What was wrong with that deal, in your opinion?A: One, they were buying no assets; they were buying a customer list. The rationale was ludicrous -- [the notion that] there was synergy. Thirdly, they just threw money out the window, and they had too much money on the balance sheet. So I sold the stock when it was, I think, in the mid-50s, and it went down into the 30s.

Q:As our story noted, Schlumberger's board of directors recently brought in chief operating officer Andrew Gould, whose background was in oil services, to replace retiring chief executive D. Euan Baird. How do you see that move playing out? A: You knew [Gould] was going to clean the plate, and he has. My understanding is that the technology has remained pretty premier, certainly on the oil field service side. I think their business will pick up; they are everywhere in the world. They substantially took the hit on Sema.

Q:How undervalued do you think Schlumberger is?A: Well, I think it is very hard to value, because these are trough earnings.

Q:So is the story a new CEO shaking things up and getting the business more focused? A: Right, and this group moves really homogeneously. So when the group moves, [SLB] is probably one of the leaders in the group.

Q:What's your price target? A: I would think anywhere from 46 to 50 -- up about 25%-35% rationally is where you probably should sell most of your stock. (Editor's note: The shares are currently at 39.82.)

Q:Let's move on to your next pick.A: It's
Vornado Realty Trust
(VNO). I think the REITs are very interesting because real estate hasn't bottomed.

Q:Have the REITS come back a bit?A: They are down. But the interesting thing is the retail REITs are pretty much on top, and the apartment REITs are the ones that have done the worst because they started to fall apart before anyone else. Now a whole bunch of office REITs and industrial REITs are sort of joining the parade.

Q:Vornado owns some property around Penn Station in New York City. A: They are essentially in two cities: Washington, D.C., and New York. Their NAV (net asset value) is somewhere around 43-44. In my opinion, they are one of the best-disciplined REITs in the country. They've never bought anything, to my knowledge, that they couldn't add value to. They made one major mistake where they joint ventured and bought a cold storage operation, which has cost them money and time. I think they are between six to 12 months away from getting rid of that. Their dividend yield is 8%.

Q:What else to you like about this company?A: [CEO and chairman] Steven Roth and [President] Michael Fascitelli, two of the best real estate guys in the country. And they have 70%-80% of their net worth in this company, so essentially you are their partner. The negative is they don't tell you everything.

Q:Is it a case of Vornado being in the right spot when the economy picks up? A: They are very disciplined, and they have liquidity. They have over a billion dollars of liquidity, and you are getting paid to wait. And on a relative basis, the two best markets for offices are New York and Washington.

Q:What is it that the market has been so concerned about? Because this all sounds pretty good. Is it just the economy?A: Two things. Number one: people take money out of REIT funds so they have to sell their big liquid stocks or trim them down. Number two: people hear "office," and they'll tell you there is lots to lease in New York. And if you call Vornado, they will tell you that you are right. Number three: I think some analysts get irritated because you pick up the third quarter and [Vornado] is writing off an investment that they had that you didn't know they had -- and that kind of thing. They run it as their private preserve. There are no conference calls, there are no glitz shows. If you look at the REIT [investing] conferences, they're not there. But they are very disciplined, and they buy things opportunistically.

Q:Where should the stock trade? At its NAV?A: I don't think REITs should sell at their NAV; they should sell at a 5% discount to their NAV.

Q:So where would that get the stock?A: 41

Q:One more pick, please. A: Well, I like
Citigroup,
but I've been dead wrong on the continuous contraction of the multiple on the public image.

Q:What's the multiple right now on forward earnings, about 14 or 15 times? A: Well, it's 11x.

Q:So, it's come down considerably?A: And they've done, I think, a very admirable job in their underlying businesses. Of course, you have the "Sandy" Weill factor, and you have the Jack Grubman factor, and you have the civil suits -- whatever negative image. But they make strategically smart acquisitions, and it is one of the most powerful financial institutions in the country. And the multiple has gone probably from 17x to 11x.

Q:Because it seems like their earnings have come through quite well, have they not? A: Yes, I think they've missed very little.

Q:So, is it just the taint of these various issues hanging over the stock? A: I think it is the taint. I think people don't want to go to institutional meetings quite honestly and be beaten up. And I think the shorts scare people. And there hasn't been a lot of good news in their businesses.

Q:What is the case to be made that this stock will get a higher multiple? Because the earnings growth is in the solid double-digit range. A: Right. I think for me if they keep doing what they are doing in running the business -- and as soon as we get the [New York State Attorney General] Eliot Spitzer off the front page -- it becomes less of a concern. And that will be when the business is better, and when the world's better. If the market turns around, generally brokerage-related or asset-manager related stocks do better. And if the economy ever improves, credit will be better, and they are extremely well situated.

Q:What do you think the stock is worth?A: Depending when this happens, it's certainly worth a market multiple; it is not a company [you can duplicate]. I think it is worth the market multiple, if not a premium.

Q:And where would that get the stock to?A: It depends; the S&P numbers are so fuzzy. But let's say it's worth 15x. The stock's at 33 now, and it could trade up to 45.

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